Netflix Naysayers Up the Rhetoric19 Apr, 2016 By: Erik Gruenwedel
With a stock valuation that has at times mirrored a ride on a high-speed ferris wheel, Netflix’s 13% drop after it offered tepid international subscriber growth guidance unleashed the wrath of Wall Street naysayers. While some critics are merely shorting the stock, others say the foreign sub guidance (2M subs vs. 3.5M market estimates) underscores Netflix’s challenges launching a global business.
With domestic sub growth pegged at 500,000, down 45% from the previous-year period, it’s safe to say competitors Amazon Prime Video and Hulu have become more than Netflix’s podium placeholders.
“We remain cautious due to valuation … and a more skeptical view of the company’s international rollout,” MoffettNathanson’s Michael Nathanson wrote in his April 19 Netflix note, “A Quarter That Makes You Stop & Think.”
Nathanson, who has co-hosted Netflix fiscal webcasts, said the reduced guidance on foreign subs was the “biggest surprise” of the financials — underscoring the fact the service was paying the price for higher-than-expected previous-year launch comparisons in Australia and New Zealand.
“[Global] launches are based on a skimming strategy that should take time to reach ‘normalized’ penetration levels,” he wrote.
Wedbush Securities' Michael Pachter — a longtime Netflix bear — questioned the SVOD service’s excuse that it was a victim of its own success and thus unable to match past international quarterly sub growth.
“Australia and New Zealand … with combined households of 9.4 million … apparently signed up for Netflix subscriptions with such force [a year ago] as to present a near impossible comparison [about 400,000 less, says Pachter] this year,” the analyst wrote in an April 19 note.
Pachter often criticizes Netflix on its free cash burn and the fact the service prefers to amortize, instead of expense, burgeoning content licensing and production spending — more than $5 billion in 2016.
While Netflix’s senior management gave kudos to Amazon and Hulu, Pachter contends the service is ignoring the threat of standalone Prime Video. He suggests Prime Video will attract 40% of its domestic subscribers growth going forward, which will undermine Netflix’s growth. With Amazon operating Prime Video as a standalone service, it will up the ante for acquiring new content, suggesting Netflix may be underestimating the rate of escalation for its content spend.
“This creates a double-whammy for Netflix: higher content spend and slowing subscriber growth,” Pachter wrote.
“While we don’t think that Amazon will attract many current Netflix customers, we think it is foolish to assume that potential SVOD customers will favor Netflix over Amazon every time. We acknowledge that Netflix has the much more powerful brand for SVOD, but we are confident that once it announced a standalone service, Amazon declared war on Netflix, and intends to back up its new offering with a branding strategy of its own.”
Indeed, Jonathan Rettinger, president of TechnoBuffalo, told CNBC Netflix has a lot to worry about over the next few months.
"Netflix has had an incredible rise, but they need to be looking over their shoulder because there is an onslaught coming led by Amazon," Rettinger said.